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Forced Retirement Risk and Portfolio Choice

Guodong Chen (), Minjoon Lee () and Tong-yob Nam ()
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Guodong Chen: Department of Finance, New York University at Shanghai,
Tong-yob Nam: Office of the Comptroller of the Currency, U.S. Department of Treasury,

No 18-06, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using the Health and Retirement Study data, this paper finds the forced retirement risk to be significant and also highly correlated with stock market fluctuations. A life-cycle portfolio choice model with the estimated forced retirement risk shows that the labor income of those subject to the risk of forced retirement becomes stock-like as individuals approach retirement. Therefore, contrary to conventional wisdom, those who are still working but close to retirement should have a lower share of risky assets in their financial portfolios than retirees do. Given that most financial assets are held by middle-aged households, this finding gives an alternative explanation to the risk premium puzzle.

Keywords: Forced Retirement; Portfolio Choice; the Risk Premium Puzzle (search for similar items in EconPapers)
JEL-codes: D14 E11 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age and nep-mac
Date: 2018-06-20
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Published: Carleton Economic Papers

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Handle: RePEc:car:carecp:18-06